Amazon’s position in the market
It is no secret that Amazon is dominant in eCommerce, but what happens when a company of its size and reputation is thrown under the political microscope for potential foul play? This article will assess the recent probe initiated by the EU on Amazon’s use of merchant data, how data is becoming integral to unlocking a business’s potential, and what the potential ramifications are for businesses who abuse the power of data.
First, to highlight Amazon’s dominance in the market, it is reported that in the last two years, Amazon managed to increase its share of the total US eCommerce market from 38% to 49%. Amazon holds almost half of the massive $252.7 billion market – that’s more than double the market share of the next nine companies (including eBay, Walmart, Best Buy, Apple, etc.) combined.
The business has evolved drastically over time, from a retailer focused on driving sales through its vast product portfolio, to one that now offers a service-led value proposition both online and offline. For example, its Prime service is now no longer exclusively about providing a quicker and more convenient delivery proposition. Prime incorporates a range of other benefits that extend beyond its delivery promise, e.g. discount when shopping at Whole Foods and unlimited video/music streaming.
Arguably, it is the power of Prime that has caused a step-change in the market and allowed Amazon to separate itself from its competitors, by offering an all-inclusive package that is wholly centred around the consumer. From a business perspective, the retailer has been able to capitalise on its Prime service by introducing ‘Prime exclusive’ deals / events, e.g. the annual Prime Day. Not only does the event boost overall sales, but it encourages sign up to its program and the cycle becomes a self-perpetuating one in which Amazon can only win (in the immediate term, at least).
The chart below puts this into perspective and showcases how a single event for Amazon Prime customers can drive significant incrementality in sales for the retailer:
Prime Day has not only created an energy around Amazon, but the event has brought a beneficial ‘holiday season’ effect to all retailers/brands competing for customers’ cash. Many retailers have taken advantage of the fact that consumers are already in the shopping mindset. The retailers that react quickly enough focus on personalised and targeted offerings, and promotional campaigns around Prime Day can all experience the benefits of Amazon’s bespoke event.
The threats to Amazon’s long-term plan
Over time, Amazon has seemingly sprawled into every corner of every industry; marketplace, media, advertising, entertainment, music and offline. Also, through Amazon Fresh and its purchase of Whole Foods, the company has a big hand in our food supply as well. Finally, it is also by far the market leader in hosted cloud services with Amazon Web Services, which means that an online retailer that wanted to compete with Amazon will very possibly be doing so with a website that lives on Amazon servers.
Questions have been raised as to whether customers will lose trust in Amazon if it continues along this monopolistic trajectory, stifling the competition on its way. Anti-trust law (competition law) often offers very little solution to this, on the basis that Amazon strategically positions itself as being ‘the most consumer-centric business in the world’. Jeff Bezos echoed this by stating: “We are so inventive that whatever regulations are promulgated, that will not stop us from serving our customers.”
The rise of Amazon’s private label offering demonstrates one way in which the business is leveraging the data at its disposal as a means by which to inform its own strategic direction, often to the detriment of other players in the market.
For example, the data at Amazon’s fingertips gives them a phenomenal ability to systematically assess the value of the brands sold through them and to determine which products they should pursue on their own. They simply use their marketplace as a laboratory to identify products that have a meaningful brand tax. Then they contract with manufacturers to produce those products, building a profitable volume for themselves and passing the savings on to customers at the same time.
It is reported that Amazon’s own brand batteries held a 30%+ market share in online battery purchases in the US in 2017, far surpassing Duracell, Panasonic and Energizer. This clearly demonstrates how strategic utilisation of data can drive commercial value for Amazon’s business, in this case through its private label offering. Equally, it highlights how other brands in the market can be undercut by Amazon offering a cheaper version of their product. It is this kind of behaviour that is forcing consumers and governments to pay closer attention to the methods by which Amazon operates.
Amazon and ‘Big Data’ in the political agenda
Amazon recently found itself in hot water when the EU launched a preliminary investigation into how the platform uses merchant data. Commissioner Margarethe Vestager voiced the fact that people have been asking increasingly about dual purpose platforms, like Amazon, who act as both host and competitor. They are hosting a lot of merchants, and at the same time, they themselves are big merchants.
Providing services to other merchants puts Amazon in a position to see a lot of data coming from those players. That can be entirely legitimate, since Amazon can use that data to improve the services it provides sellers. However, the concern is that it can also be misused by Amazon if they take advantage of the data insights collected, using them to inform their own calculations/strategy, ultimately giving themselves the competitive advantage. It is at this point that breach of anti-trust legislation comes into play.
Without focusing too much on the technicalities of what a breach of anti-trust law may mean for the retailer from a legal standpoint, it is worth framing the situation more simply, and considering the impact that loss of trust from consumers might have on the long-term stability of the business. When public opinion changes, existing realities give way to new demands. This is relevant for Amazon because a proven breach in anti-trust rules might result in consumers losing trust in the business and demanding something different.
Potentially, companies found to be in breach of EU anti-trust rules can be fined up to 10% of their global annual turnover. Famously, Google was fined $2.4 billion by the EU for abusing its dominance of the search engine market in building its online shopping service. EU regulators said by artificially and illegally promoting its own price comparison service in searches, Google denied consumers genuine choice and rival firms the ability to compete on a level playing field.
It remains to be seen whether this will be the outcome for Amazon — although the challenge, in itself, highlights to the consumer question marks over Amazon’s actions — by bringing to focus the possibility that it is leveraging data from its third-party sellers to achieve a monopolistic advantage.
In a similar vein, consumers may well then be prompted to consider how Amazon makes use of their own personal data. Suddenly, the integrity of the business more broadly is under scrutiny, by which point (for a business that has built its entire brand around a consumer-centric model), arguably, the problems have already begun.
The power of data – an opportunity and a threat
Every business is looking for ways to get tighter connection with its customers, to improve prediction and move them along a trajectory. We are seeing a certain urgency around Big Data. Big Data refers to extremely large data sets that may be digitally analysed to reveal patterns, trends, and associations, especially relating to human behaviour and interactions.
Netflix is a good example of a company that uses data and analytics to give itself a competitive edge. With more than 100 million subscribers around the world, who generate an extraordinary amount of data to analyse, Netflix has access to many insights about its viewers that help drive its success. However, it is not just the amount of data that they have available that gives the company an edge — it is how they use that data to personalise and improve the user experience that makes it powerful. The data at Netflix’s fingertips has resulted in 33 million versions of Netflix having been produced, all powered by different algorithms that are tailored to different view preferences. The success in its use of data to shape user decision making is evidenced by the fact that nearly 80% of views come from the ‘recommended for you’ offerings.
Big Data comes with promise, but it also comes with risk. First is the erosion of privacy. More people and businesses know more about each of us than at any point in human history. It’s not only easy to find where we live, but also where we go, who we love, how we live, and what we think.
The effect is that individuals and societies are more open to manipulation. We can be tricked into giving up our passwords and credit card numbers, and our behaviour is very much open to external influence. Essentially, more data offers more ways for advertisers and media companies to shape our desires and values. Increasingly, data appropriation is perceived as a form of exploitation because companies use data to create value without providing people with comparable compensation.
Not only can data be used to manipulate consumers and impinge on their privacy rights, but there is also considerable security risk associated with data breach by companies. As more data is generated, that data is stored in more places, opening up more targets for attack. No longer is it enough for us to safeguard our own devices. Data breaches are now a regular occurrence and the distribution of our data is out of our hands.
Even companies who do a good job of protecting our data from outside attack often do questionable things with the data themselves. For example, Facebook was caught up in a highly publicised scandal whereby data harvested through the platform was then sold to a company to help political parties target voters. Following the scandal, a US poll reported that just 41% of Americans trust Facebook to “obey laws that protect their personal information”. Again, this brings in to focus how the exposure of the misuse of data by platforms such as Amazon and Facebook can generate a loss of trust in users which may be difficult for the tech giants to restore.
We know that we live in a world of Big Data and that, despite the risks, businesses will continue to use the data available to them to connect more with consumers and ultimately drive commercial value. The challenge comes in the way that data is used and the extent to which it is to the perceived benefit of the customer or the company.
The reality is that more often than not it is used to the benefit of both, but there is a fine line between strategic and appropriate use of data and misconduct, and businesses must be mindful of this if they want to retain the trust and loyalty of their customers.
The second challenge is related to data protection and security – as more of our personal information is shared and stored, there is increasing risk of that data being leaked and becoming publicly available. Cathay Pacific has just been involved in a data breach that highlights how scalable the issue can become, with 9.5 million customers reportedly affected.
From PHD’s perspective, despite Amazon’s central vision as a consumer-centric business, there will always be an element of corporate interest that fuels it from a business perspective. Amazon would not have achieved its extraordinary growth and dominance in the market if it weren’t for certain elements of its business operation that help it to achieve competitive advantage.
For example, the wealth of data available to Amazon powers the algorithms that dictate the product listings, and ultimately provides the best experience possible to the customer. This data comes from both consumers and brands, so in effect Amazon is capitalising on the information provided by consumer and merchant interactions with its platform. Whilst this might be done with good intentions of improving user experience, as Amazon continues to shape our lives through the many services it provides, there is increasing nervousness around the amount of control it has, not only within the market but also over our personal preferences and consumer choices.
This growing concern on the use or misuse of customer data has so far not resulted in any real intervention significant enough to disrupt the status quo. However, Tim Berners-Lee, founder of the World Wide Web, is on a mission to give back control of online interactions to the customer. Berners-Lee is in the process of creating a decentralised web with the view to give users more personal control over their data.
In a recent blog post explaining his new venture he states:
“For all the good we have achieved, the web has evolved into an engine of inequity and division; swayed by powerful forces who use it for their own agendas… People want to have a web they can trust. People want apps that help them do what they want and need to do — without spying on them.”
It will be interesting to see how the likes of Amazon and Facebook will react if this alternate web comes into fruition. We suspect that it will highlight just how reliant these corporations are on data capture and processing to drive their performance.
Gradually, consumers are becoming more aware of the ways data is used being used by businesses and we are reaching a tipping point with many consumers looking for alternative options that better protect their personal information. The bottom line is consumers (and merchants) do not want to leave themselves so open to manipulation by corporations who use data to pursue their own agendas.
PHD’s view is that despite these bumps in the road, Amazon will continue to dominate the market – the value it has created in its services is extraordinary, and it will likely take more than one misdemeanour to completely change that. Ultimately, Amazon’s consumers are typically price- and convenience-oriented and Amazon delivers on that.
That said, it is likely that these kind of investigations (alongside increasing awareness from consumers on the role Big Data has to play) do negatively influence consumer perceptions of the retailer. However, when price and convenience is king, changing consumer perceptions does not necessarily translate into changing consumer behaviours.
Realistically, Amazon has been and always will be a data-driven business. One of its core focuses surrounds how it can leverage the vast amount of data that it collects to better understand the desires of its customer, from both a service and product perspective. Ultimately, until there are any tangible disruptors to the way that it operates, whether that is through the adoption of Berners-Lee’s privatised web, or changes to legislation following this EU investigation, Amazon will continue to dominate the space.
What are the key considerations for our brands?
1. As data becomes integral to driving business development, consider carefully the ways in which your brands can potentialize on the value of data. There is a fine line between utilisation of data to promote your own offering and utilisation of data to directly disadvantage your competitors. The potential ramifications for your brand, both in terms of financial penalty and reputational damage, unfold the moment that data usage is considered to be ‘anti-competitive’.
2. The second key implication for brands surrounds data protection. The onus is on the brands/retailers to ensure the data that is provided to them by their customers is well protected and the privacy rights of the consumer are withheld.
As more data is collected and used, the repercussions of a breach of that data become amplified. Cathay Pacific’s recent data breach puts this into perspective, as the personal information of millions of its customers was released, and the promise of the company to protect that information was undermined. Not only this, but it is reported that shares in Cathay Pacific dropped 6% following the scandal. It remains to be seen how many of the 9.5 million customers whose data has been stolen will continue to fly with the airline. However, there is a real possibility that the business will lose market share as a direct consequence of this, and the company should be prepared for that.
Again, this highlights that there are considerable risks associated with data breach, both from the angle of the customer and the business itself, and so it is absolutely imperative that brands/business owners take responsibility for the data they collect and use, and do not underestimate how destructive data breach/misuse can be in an already challenging market.